Market Update: Tuesday, November 28, 2017

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Market Recap

  • Major domestic indexes mixed ahead of fairly busy week of macro headlines. Dow +0.1%, S&P 500 Index flat, Nasdaq -0.2%.
  • Telecommunications, utilities led; materials, energy fell on lower commodity prices.
  • 10-year note yield -1 basis point (-0.01%) to 2.33%.
  • Negative breadth amid another low volume session (~93% of 30-day avg.).
  • Commodities – WTI crude oil -1.8% to $57.89/bbl., COMEX gold +0.5% to $1293/oz. U.S. dollar strengthened vs. most major crosses.

Overnight & This Morning

  • Domestic stocks opened up slightly. Focus on Powell hearing before Senate Banking Committee (details below).
  • European equities mostly higher midday, led by oil & gas performance. STOXX Europe 600 +0.4%, DAX +0.3%, CAC 40 +0.5%.
  • Asian markets close mixed, investors waiting for testimonies by Fed Chair Janet Yellen, nominee Powell. Shanghai Composite +0.3%, Hang Seng flat, Nikkei flat.
  • Commodities – Crude continues pullback (-0.3% to $57.96/bbl.), gold -0.3% at $1291/oz., industrial metals lower.
  • 10-year note yield -1 basis point (-0.01%) to 2.32%.
  • Economic data – International trade data showed larger than expected deficit (-$68.3B vs. -$64.1B), wholesale inventories lower than expected (-0.4% month-over-month vs. 0.3%).

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Key Insights

  • Bonds may not be a hero in 2018, but remain an important sidekick. High-quality fixed income markets may be under pressure in 2018, due to rising levels of growth and inflation, reduced central bank accommodation, and the potential for fiscal stimulus. Shorter-term rates will likely be pressured higher by continued, gradual rate hikes by the Federal Reserve (Fed) as the economy continues to move ahead. This backdrop informs our expectation for flat to low-single-digit returns for the broad high-quality fixed income market (the Bloomberg Barclays U.S. Aggregate Bond Index). Lower-quality fixed income may be poised for another decent year of returns amid continued equity market strength, but returns will almost necessarily be driven primarily by yield, as spreads over comparable maturity Treasuries are already low by historical standards. In balanced portfolios, we think higher-quality fixed income should be emphasized due to its diversification and risk mitigation benefits, with lower-quality fixed income used at the margins for suitable investors.

Macro Notes

  • Municipals fall even as other high-quality sectors see gains. The Bloomberg Barclays Municipal Bond Index is down 0.3% over the past month, while the high-quality Bloomberg Barclays U.S. Aggregate Bond Index has gained 0.5% over the same time period. The main reason for the divergence in these two indexes is the ongoing tax reform debate. Language in the House tax reform proposal would remove tax exemption from private activity, tax credit, and advance refunding bonds that are issued after December 31, 2017. If enacted, this could end up benefiting municipal bond prices in the future as the supply of tax-free bonds in the market would likely fall. But in the shorter run, this has led issuers to push to get new offerings in ahead of the December 31 deadline, which will likely lead to a increased supply through year end, which has put pressure on prices. The tax reform discussion is ongoing, and changing expectations about what the final bill will look like could cause additional volatility in the municipal market as we head toward year end.
  • Powell points to status quo at the Fed. No major changes expected at the Fed when Powell becomes chairman early next year. In written testimony released ahead of today’s confirmation hearing, Powell said Fed’s aim is to “sustain a strong jobs market with inflation moving gradually up toward our target.” Powell also defended Fed’s independence, noting he is a “strong supporter of this institutional structure, which helps ensure a diversity of perspectives on monetary policy and helps sustain the public’s support for the Federal Reserve as an institution.” Bloomberg article discussed some of the big themes that are likely to come up at today’s hearing. These include low inflation, the potential reconsideration of the Fed’s inflation target, what to do if another recession hits, the impact of tax reform, and regulation. (Source: FactSet)
  • Cyber Monday sales hit new record. Still a lot of headlines surrounding the fairly upbeat start to the holiday shopping season. According to latest report from Adobe, Cyber Monday online sales rose 16.8% y/y to a record $6.59B. This compares to the $5.03B in online sales on Friday and $2.87B on Thanksgiving Day. Overall web traffic to retail sites increased by 11.9% on Cyber Monday, with the season average at 5.7%. Mobile set a new record representing 47.4% of visits and 33.1% of revenue. Smartphone traffic specifically grew 22.2%. While takeaways were positive, there is still concern that momentum could wane as shoppers wait until just before Christmas for better deals. (Source: FactSet)
  • Synchronized upswing in global growth drives stocks. More attention on the synchronized upswing in global growth, which has been widely cited as the key upside driver for stocks this year (along with the ongoing corporate profit recovery and still supportive monetary policy). WSJ article on Monday noted that the increasingly synchronized global economic recovery has allowed the vast majority of global stock markets in 2017 to surge to either fresh records or multi-year highs. Half of the 35 major indexes representing world’s biggest stock markets by value have hit all-time highs this year, the most since 2007. (Source: FactSet)
  • OECD raises 2018 global growth forecast. The Organization for Economic Cooperation and Development (OECD) updated its gross domestic product growth forecast to 3.6% from 3.5%, supported by policy stimulus and being accompanied by solid employment gains, a moderate upturn in investment, and a pick-up in trade growth. It also noted that the global economy is now growing at its fastest pace since 2010, with the upturn becoming increasingly synchronized across countries. The biggest increase is for the Eurozone (2.4% vs. 2.1%), while growth rates in Japan and the U.K. were downwardly revised (1.5% vs. 1.6%).
  • How do small caps look? As we discussed in our Outlook 2018: Return of the Business Cycle, there are many positive fundamental factors which could help small caps have a strong year in 2018. Today on the LPL Research blog we take another look at small caps and show why the technicals, along with the fundamentals, appear to support our bullish thesis.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Wholesale Inventories (Oct)
  • Case-Shiller Home Price Index (Sep)
  • Consumer Confidence (Nov)
  • Richmond Fed Mfg. Report (Nov)
  • Eurozone: Money Supply (Oct)
  • Eurozone: Organisation for Economic Co-operation & Development Economic Outlook
  • Bank of Canada:  Poloz
  • Japan: Retail Sales (Oct)

Wednesday

  • GDP (Q3)
  • PCE (Q3)
  • Beige Book
  • Yellen (Dove)
  • France: GDP (Q3)
  • Germany: CPI (Nov)
  • Eurozone: Consumer Confidence (Nov)
  • BOJ: Nakaso, Iwata, Harada
  • Japan: Industrial Production (Oct)
  • Japan: Vehicle Production (Oct)
  • China: Mfg. & Non-Mfg. PMI (Nov)

Thursday

  • Personal Income & Spending (Oct)
  • Core PCE (Oct)
  • Chicago PMI (Nov)
  • France: CPI (Nov)
  • Eurozone: Unemployment Rate (Oct)
  • Italy: CPI (Nov)
  • India: GDP (Q3)
  • South Korea: GDP (Q3)
  • Japan: CPI (Oct)
  • Japan: Nikkei Japan Mfg. PMI (Nov)
  • China: Caixin China Mfg. PMI (Nov)

Friday

  • Markit Mfg. PMI (Nov)
  • Construction Spending (Oct)
  • Germany: Import Price Index (Oct)
  • Italy: Markit/ ADACI Italy Mfg. PMI (Nov)
  • France: Markit France Mfg. PMI (Nov)
  • Germany: Markit Germany Mfg. PMI (Nov)
  • Italy: GDP (Q3)
  • Eurozone: Markit Eurozone Mfg. PMI (Nov)
  • UK: Markit UK Mfg. PMI (Nov)
  • Brazil: GDP (Q3)
  • Canada: GDP (Sep)
  • Japan: Vehicle Sales (Nov)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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